U.S. stocks wavered between gain and loss several times yesterday before rallying in the final minutes to close higher. The tug-and-war session began after the pre-market release for July personal income registered the largest decline in four years as a special addition to government transfer payments (part of the stimulus package) ran its course – this has been the only boost to incomes for several months as private-sector components have been falling. Stocks rallied, however, after the latest pending home sales report easily surpassed expectations, suggesting home-buying activity will rise for the next couple-to-three months.
Financial, industrial and consumer shares were the leaders yesterday. Certainly the housing number helped these groups, but it was rather surprising how consumer shares looked past the income figures. In the very short-term the “cash for clunkers” program will offer a boost to consumer activity but it is front-loading spending; personal consumption will fall off again when the program expires.
Utility shares led the declining sectors after East coast electric power company PPL Corp. reduced its 2010 forecast as they see power demand will continue to erode.
Market Activity for August 4, 2009
Personal Income and Spending
The Commerce Department reported that personal income fell 1.3% in June, the largest percentage decline in four years, pretty much erasing the May increase of 1.3% -- that number was revised lower, originally estimated as a 1.4% increase.
The June figure was pushed lower as government transfer payments fell 5.9% for the month. As we mentioned last month, government transfer payments made up 97% of the May income gain and one cannot view such realities as sustainable – it was illogical for the market to get excited about that increase. The area that really matters, private-sector incomes, fell again – rental incomes were the only segment to rise, up 1.0%.
Compensation, normally the largest part of personal income, fell another 0.3% in June, down 3.8% year-over-year. Wages and salaries fell 0.4%, down 4.7% from the year-ago period – the largest annual decline since these records began in 1960. Proprietor’s income slipped 0.1% in June, off by 8.3% year-over-year. Income from assets (a combination of interest and dividend income) fell 0.4% and is down 10.8% from June 2008. Farm income got hammered, down 3.2% in June and crushed over the last year, lower by 44.5%.
This didn’t stop spending from rising for the month though as personal outlays rose 0.4%, which was more than the 0.3% expected. This may marginally improve the Q2 GDP report when it is revised later this month. Spending on non-durable goods led the increase, up 1.65% for goods meant to last less than three years. Spending on durable goods fell 0.2%. On an inflation-adjusted basis personal spending was down 0.13% in June and is down 2.15% year-over-year.
As a result of the decline in incomes, while spending increased at the same time, the personal savings rate (what I refer to as cash savings) slipped to 4.6% from 6.2% in May. This reading will pull back a bit more over the next couple of months as the CARS program will boost spending for July and probably August. (The market may become very excited over these consumer readings, but will have the rug pulled out from under its euphoria as personal outlays will decline when Uncle Sugar…sorry, Sam, ends his cash handouts.
A few months out, we will then see this measure of savings resume its march to 8-10% as the job market remains fragile for sometime to come and stock and home values (the two largest savings vehicles) remain off of their peaks by 36% and 21%, respectively. Later, when interest rates being to move higher, this savings figure will pick up speed as there will be an additional incentive to hold cash.
Pending Home Sales
The National Association of Realtors reported that pending home sales jumped in June, marking the fifth-straight month of increase. Pending sales, which indicate actual sales will follow two months later, rose 3.6% for June after a 0.8% rise in May, a number that was revised up from 0.1%. So long as there aren’t too many loans that fall apart by the time of closing, we’re going to see a few months of sales advances – a very good sign for the supply figure, which has improved but remains elevated.
All four regions of the country reported an increase in contract signings. The South led the way with a 7.1% gain; the West saw pending sales rise 2.9%; pending sales in the Midwest rose 0.8%; the Northeast was the laggard, with pending home sales up just 0.4%.
As we’ve been talking about, a sustained recovery in home sales is unlikely as the tax-credit for first-time buyers expires by December and one cannot expect interest rates to remain this low for long. Still, this is great news for the housing market as it is beginning to find its legs, even if the rebound is due to the aforementioned stimulus. Let’s hope we’re not front-loading things (as we seem to be within other areas of the economy), as first-timers are rushing to get in by the November 30 cut off for that tax credit, only to see sales move meaningfully lower in 2010. (I don’t enjoy striking this pessimistic tone, but I also don’t want to look naïve when the inevitable occurs).
Have a great day!
Brent Vondera, Senior Analyst
Financial, industrial and consumer shares were the leaders yesterday. Certainly the housing number helped these groups, but it was rather surprising how consumer shares looked past the income figures. In the very short-term the “cash for clunkers” program will offer a boost to consumer activity but it is front-loading spending; personal consumption will fall off again when the program expires.
Utility shares led the declining sectors after East coast electric power company PPL Corp. reduced its 2010 forecast as they see power demand will continue to erode.
Market Activity for August 4, 2009
Personal Income and SpendingThe Commerce Department reported that personal income fell 1.3% in June, the largest percentage decline in four years, pretty much erasing the May increase of 1.3% -- that number was revised lower, originally estimated as a 1.4% increase.
The June figure was pushed lower as government transfer payments fell 5.9% for the month. As we mentioned last month, government transfer payments made up 97% of the May income gain and one cannot view such realities as sustainable – it was illogical for the market to get excited about that increase. The area that really matters, private-sector incomes, fell again – rental incomes were the only segment to rise, up 1.0%.
Compensation, normally the largest part of personal income, fell another 0.3% in June, down 3.8% year-over-year. Wages and salaries fell 0.4%, down 4.7% from the year-ago period – the largest annual decline since these records began in 1960. Proprietor’s income slipped 0.1% in June, off by 8.3% year-over-year. Income from assets (a combination of interest and dividend income) fell 0.4% and is down 10.8% from June 2008. Farm income got hammered, down 3.2% in June and crushed over the last year, lower by 44.5%.
This didn’t stop spending from rising for the month though as personal outlays rose 0.4%, which was more than the 0.3% expected. This may marginally improve the Q2 GDP report when it is revised later this month. Spending on non-durable goods led the increase, up 1.65% for goods meant to last less than three years. Spending on durable goods fell 0.2%. On an inflation-adjusted basis personal spending was down 0.13% in June and is down 2.15% year-over-year.As a result of the decline in incomes, while spending increased at the same time, the personal savings rate (what I refer to as cash savings) slipped to 4.6% from 6.2% in May. This reading will pull back a bit more over the next couple of months as the CARS program will boost spending for July and probably August. (The market may become very excited over these consumer readings, but will have the rug pulled out from under its euphoria as personal outlays will decline when Uncle Sugar…sorry, Sam, ends his cash handouts.
A few months out, we will then see this measure of savings resume its march to 8-10% as the job market remains fragile for sometime to come and stock and home values (the two largest savings vehicles) remain off of their peaks by 36% and 21%, respectively. Later, when interest rates being to move higher, this savings figure will pick up speed as there will be an additional incentive to hold cash.
Pending Home SalesThe National Association of Realtors reported that pending home sales jumped in June, marking the fifth-straight month of increase. Pending sales, which indicate actual sales will follow two months later, rose 3.6% for June after a 0.8% rise in May, a number that was revised up from 0.1%. So long as there aren’t too many loans that fall apart by the time of closing, we’re going to see a few months of sales advances – a very good sign for the supply figure, which has improved but remains elevated.
All four regions of the country reported an increase in contract signings. The South led the way with a 7.1% gain; the West saw pending sales rise 2.9%; pending sales in the Midwest rose 0.8%; the Northeast was the laggard, with pending home sales up just 0.4%.
As we’ve been talking about, a sustained recovery in home sales is unlikely as the tax-credit for first-time buyers expires by December and one cannot expect interest rates to remain this low for long. Still, this is great news for the housing market as it is beginning to find its legs, even if the rebound is due to the aforementioned stimulus. Let’s hope we’re not front-loading things (as we seem to be within other areas of the economy), as first-timers are rushing to get in by the November 30 cut off for that tax credit, only to see sales move meaningfully lower in 2010. (I don’t enjoy striking this pessimistic tone, but I also don’t want to look naïve when the inevitable occurs).
Have a great day!
Brent Vondera, Senior Analyst
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